Drastic tobacco production changes proposed

Paul L. Hollis Farm Press Editorial Staff | Jun 20, 2001

A presidential commission has proposed dramatic changes in U.S. tobacco production, including paying growers a total of $11.3 billion to abandon their tobacco crops or accept annual production permits. The proposal, released in late May, recommends financing the quota buyout by raising the federal tax on cigarettes by 17 cents a pack.

The President's Commission on Improving Economic Opportunity in Communities Dependent on Tobacco Production While Protecting Public Health was created this past September by former President Clinton. The panel included farmers, health advocates and economists.

Under the commission's proposal, growers would be paid $8 per pound for their quotas, totaling $11.3 billion for the 415,750 owners of 1.4 billion pounds of quota, according to J. Michael Moore, University of Georgia Extension tobacco specialist.

Producers would receive $4 for each pound of tobacco they stop growing and $2 per pound for tobacco they continue to grow. If half of the current 81,174 tobacco farmers continued working under permits, payments would total $4.25 billion over five years.

The 17-cent increase in the current 34-cents-per-pack tax would raise $3.4 billion annually to fund the buyout, says Moore. The cigarette tax rose by 10 cents a pack in 2000 and is set to rise an additional five cents next year.

“In the first five years, the 17-cent excise tax on cigarettes would go toward the quota compensation program,” says the agronomist. “In the next five years, the tax would go to health groups to support smoking prevention efforts.”

The commission's proposal, notes Moore, includes positive points for growers, and it indicates an opportunity for cooperation between tobacco and health groups. Getting the proposal passed into law, however, may prove to be difficult, he adds.

“Already, senators from North Carolina have said they won't support an increase in cigarette excise taxes. If that's the case in the major flue-cured-producing state, then it's doubtful that non-producing states will agree to increase federal excise taxes on their consumers who choose to smoke. Getting this proposal through Congress will be difficult,” he says.

Another positive recommendation in the commission's report, says Moore, would involve the U.S. Food and Drug Administration in regulating tobacco manufacturing and tobacco products but would keep the agency off the farms and out of tobacco production.

“I think it will be a long time before any of these proposals become reality, and I don't know if we'll see anything positive come from this,” he says. “I prefer a bird in the hand to a bird in the bush. This is a big bird in the bush, and I don't see us walking away with a lot. If it does come about, it'll change dramatically the face of production.”

The executive summary of the commission's report states, “Tobacco farmers and their communities are in the midst of an unprecedented economic crisis. At the same time, public concern over the health hazards of using tobacco products is at an all-time high. Resolving these two crises will require new, visionary tobacco policy in this country.”

Tobacco farmers and their communities face a bleak future, says the report, as they are being squeezed by huge drops in demand for U.S. tobacco here and abroad, by aggressive competition from cheaper foreign-grown tobacco, by high costs to modernize their facilities and by modest increases for their crops.

Even as prices for cigarettes rise, the tobacco farmer's portion of the retail tobacco dollar falls — from seven cents in 1980 to two cents in 1998, according to the report. More than half of the tobacco farms that existed 25 years ago are gone, and the loss of tobacco farms and the income they generate has had disastrous repercussions for tobacco-dependent communities.

While the use of tobacco products threatens public health and drives up health care costs, tobacco farmers are not the culprits, contends the report. “They are the mainstay of numerous rural communities. Many are minorities. Some are the great or great-great grandchildren of farmers who raised a crop that goes back to the founding of this country and is still legal to grow today. Tobacco is their livelihood.”

Through price supports and a marketing quota system that limits both where tobacco can be grown and how much can be grown and marketed, federal policy has usurped many of the normal functions of the marketplace, states the report.

For years, the combination of price supports and the quota system made tobacco a highly profitable crop, “but given the long-term economic trends of today, the tobacco program is keeping more people in tobacco production than the system can support.

“Many tobacco farmers have few avenues of escape because they are economically dependent on their quota rights for both current and future income,” according to the report.

The report further states that a revamped federal program is needed to regulate supply, price and quality, but that the quota asset cannot be eliminated without appropriate compensation from the federal government.

The primary objectives of a revamped federal program are as follows:

Replace quotas with production permits — to be held only by active tobacco growers — that will not become marketable assets because they cannot be bought, sold or leased and will not contribute to artificial production costs for tobacco growers.

Compensate those quota owners and growers who elect to stop growing tobacco for the loss in value of their quota assets and assist growers who choose to continue producing tobacco (many of whom are family farmers) to offset the costs imposed by the current system and make the transition to the production permit system.

Provide technical assistance to tobacco farmers and their communities to diversify their crops and local economies.

Support state tobacco prevention and cessation programs and regulate manufactured tobacco products to improve the public health and reduce health care costs.

Insure the quality of U.S.-grown tobacco as well as imported foreign-grown tobacco, which is rapidly replacing U.S. tobacco in cigarettes.

The new production permit system, states the report, will mean that fewer people depend on tobacco production, either directly or indirectly, for their livelihoods. “The resulting leaner, more competitive tobacco-growing industry will be better positioned to compete successfully and take advantage of new technologies and alternative uses for tobacco that do not harm the public health.”

The commission's report also addressed the recent trend towards contracting, stating, “At the commission's hearings and in comments on the preliminary report, tobacco farmers expressed serious concerns about the trend toward contracts.”

An analysis of tobacco contracting by the University of Kentucky indicates that contracting eventually could lower prices, favor large growers, reduce grower independence and increase the cigarette manufacturers' control of the tobacco industry, “thereby creating a greater risk of potential market power abuses by the manufacturers,” according to the report.

With the emergence of contracting, the commission recommends “an auction warehouse designation program for all kinds of tobacco. Growers would be required to designate the number of pounds to be sold at auction and at which warehouse(s) and the pounds to be sold at non-auctions.”